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"Are UK assets due a post-Brexit surge?" ask analysts at Bank of America in a recent research briefing designed to asses whether the country could see a return to favour amongst international investors now that a post-Brexit trade deal has been reached between the EU and UK.
The short answer to this question is no, say economists in a research briefing note to clients, out this week.
The question being asked by clients of the global investment bank and financial services provider comes about as UK stocks and the British Pound measure cheap relative to U.S. and EU peers, with a common assumption being this discount lies with Brexit.
With a post-Brexit deal being agreed in December 2019 an assumption now exists that these assets must now play catch-up.
Valuations on UK-focussed stocks are close to record lows and positioning depressed, with UK stocks said by Bank of America to have underperformed their EU counterparts by more than 20% since the EU referendum.
The GBP/USD exchange rate has meanwhile declined by 8.0% in this same period.
"This raises the question of whether there is a meaningful Brexit discount priced into UK assets that is set to be unwound with Brexit safely behind us, paving the way for meaningful UK asset price upside," says Kamal Sharma, FX Strategist at Bank of America.
"We remain sceptical," adds Sharma.
With regards to the outlook for the British Pound, the analyst says the removal of Brexit risk premium alone cannot trigger a sustained Pound Sterling rebound.
GBP/EUR Forecasts 2021
Period: Full Year 2021
GBP/USD Forecasts 2021
Period: Full Year 2021
What matters greatly for Sterling's valuation, says Sharma, is the level of UK interest rates relative to those in other countries.
When UK interest rates are meaningfully higher this can aid the Pound higher, and "a continued recovery by the GBP would likely require a meaningful pick-up in UK yields, a scenario we think is unlikely against the backdrop of material structural headwinds from an economically-damaging Brexit deal," says Sharma.
UK yields remain depressed by Bank of England intervention in money markets, whereby they hoover up huge amounts of government and corporate debt to keep yields suppressed in order to keep the cost of borrowing as low as possible. In addition, a Bank Rate of just 0.10% already offers little return on UK money market investments, but markets are currently expecting a rate cut to 0% or below at some point by mid-year.
These headwinds are in turn likely to keep Sterling strength at bay, say a number of analysts we follow.
For their part, Bank of America maintain a medium-term bearish view on Sterling, holding year-end targets of 1.33 for the Pound-to-Dollar exchange rate at 1.0640 for the Pound-to-Euro exchange rate (0.94 in EUR/GBP).
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With regards to UK stock markets, Milla Savova, Investment Strategist at Bank of America says there is a case to be made for some near-term outperformance in stocks, with economist at the bank expecting UK economic activity to pick up by midyear.
But the longer-term outlook does not present any outperformance.
"After 10% outperformance since late May, we think they are already priced for much of the good macro news that we expect to materialise. As a consequence, our growth projections in combination with our FX strategists' cautious GBP outlook imply near-term downside for UK domestics' relative performance," says Savova.
Beyond this point there is "only marginal upside from current levels" by the end of the second quarter while Savova says a roughly flat performance trajectory can be expected by year-end, "leaving us neutral on UK domestics versus exporters overall".